Debt Ceiling Assessment

The jokers in DC have, unsurprisingly, managed to ensure that “business as usual” is safe and sound – while pretending to wear the newly fashionable hairshirt of fiscal responsibility. The actual spending cuts (as opposed to crossing items off of Santa’s wish list and calling them “cuts”) in the debt ceiling deal amount to roughly $30 billion. In exchange, the American people now have an additional $2.4 TRILLION worth of perpetual debt on our shoulders. In a year and a half, we will go through this nonsense again. This is a complete fraud. In a just society, the revolution would start now and a lot of people in DC would swing from a rope. It won’t happen. Those who are the most screwed by this deal (the young) are also the ones who have the most recent experience with an education system that is good only at inculcating propaganda about how great things are.

Even Bill Gross – the bailout-loving bond vigilante who has been AWOL for a couple decades – admits it is a fraud in his weekly update – Kings of the Wild Frontier. He does provide useful advice from a bond investors perspective:

He correctly states that there are only four options that the US government has (apart from outright default which won’t ever happen):
1. Balance the budget via growth — Won’t ever happen. The debt load itself now ensures that interest rates which accompany increased growth will strangle that growth and drive deficits deeper.

2. Unexpected inflation — Nice emphasis on unexpected. IOW – TIPS are garbage — as are any and all government stats re inflation. They will lie to the bitter end about what inflation actually is.

3. Currency depreciation — I disagree with Gross here. There is only a small and dwindling group of currencies against which the US$ can really depreciate. Solid, fiscally responsible nations that issue a fiat currency. None — NONE — of them are remotely large enough to take the necessary appreciation hit. And for all the world’s bitching and moaning about the dollar as a reserve currency, not one country has ever remotely considered taking the necessary penalty (gutting one’s manufacturing/export/surplus sector in order to become consumption/demand/deficit of last resort for the world) required to have the “privilege” of being the reserve currency. At best, the “fiscally responsible” are merely the last lemming rushing toward the cliff.

4. Financial repression — Gross only mentions negative real interest rates. He is correct that this is permanent. And this is the real tailwind that will drive gold and monetizable backwardated commodities higher (in purchasing power terms – not necessarily nominal terms). When gold yields zero – and Treasuries also yield zero; it is a no-brainer as to where one should put their money. That said — Gross is missing literally thousands of other means of financial repression and thievery. Most of which are now certain to be tried.

It is critical however to understand how DEFLATIONARY these sovereign debt defaults/jitters are. Monetizable commodities will do OK — but understand the difference between a monetizable commodity and a regular commodity.


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